The Union Budget updated Section 87A of the Income Tax Act to offer significant relief to middle-income taxpayers. Under the New Tax Regime, individuals earning up to ₹12 Lakh per year can benefit from a full rebate, reducing their net income tax liability to zero.
What is Section 87A Tax Rebate?
Section 87A is a provision designed to reduce the tax burden on taxpayers with incomes below a specified threshold. Eligible taxpayers can claim a full rebate, which is subtracted directly from their tax liability before the 4% Health and Education Cess is calculated.
New Regime Thresholds vs. Old Regime
The rebate rules operate differently depending on the tax regime chosen for FY 2025-26 (AY 2026-27):
- New Tax Regime (Default): Taxable income up to ₹12,000,000 (after a standard deduction of ₹75,000) qualifies for a full rebate. This means individuals earning a gross salary of up to ₹12.75 Lakh can effectively pay zero tax.
- Old Tax Regime: The rebate threshold remains capped at ₹5,00,000. Individuals earning above ₹5 Lakh under the Old Regime cannot claim the Section 87A rebate.
How is the Rebate Computed?
If your taxable income is ₹11,500,000 under the New Regime:
- Apply standard tax slabs (first ₹3 Lakh is nil, 3-6 Lakh is 5%, 6-9 Lakh is 10%, 9-12 Lakh is 15%).
- Your calculated gross tax before cess would be ₹15,000 (from 5% slab) + ₹30,000 (from 10% slab) + ₹37,500 (from 15% slab) = ₹82,500.
- Because your income is below the ₹12 Lakh threshold, Section 87A provides a rebate equal to ₹82,500, making your net payable tax ₹0.